Market Comment (7th Jan 2011, 11:00)

The FTSE 100 dropped back sharply this morning, weighed down by worries about the banking and mining sectors, as investors began to reduce positions after good gains earlier in the week. Caution also predominated ahead of the monthly US jobs report.

Eurozone news

Eurozone GDP growth for the third quarter of 2010 was revised lower, Eurostat said. Growth was 0.3% instead of 0.4%, indicating that the austerity measures set in place by a number of governments were beginning to take effect. Separately, Eurostat also said that the unemployment rate across the eurozone was unchanged in November, at 10.1%. Economists had been expecting the GDP growth rate to remain unchanged at 0.4%, and the news will underscore renewed worries about the health of the wider European economy.

Brussels has published details of its plans to regulate large banks and financial institutions, in an attempt to provide a framework to defuse the next financial crisis. The European Commission’s plan for ‘Bank Recovery and Resolution’ draws heavily on the Swedish experience of the early 1990s, and aims to end the danger of moral hazard and the mispricing of risk that caused the 2008 crisis. Michel Barnier, the commission’s internal market commissioner, said that banks must be able to fail without endangering the entire financial system.

The commission plans to create a harmonised structure by the summer, with an insolvency regime in place by 2012. A European Resolution Authority will be created by 2014, creating a fourth element to the union’s architecture of financial regulation. Worries about the exact form of bondholder haircuts suggested by the plan prompted CDS spreads on European banks to rise sharply, while sovereign CDS spreads also rose. The yield on Portuguese 10-year debt rose above 7%, a sign that investors continued to remain nervous about the health of peripheral sovereign nations.

UK car sales

Sales of new cars in the UK grew by 1.8% in 2010, according to data from the Society of Motor Manufacturers (SMMT). Registrations rose to 2.03 million, but the SMMT warned that difficult market conditions would result in a 5% fall in sales during 2011. Year-on-year sales for December slumped 18% due to the end of the government’s car scrappage scheme.

UK equities – banks, easyJet, JD Sports

By 10.30am (London time), the FTSE 100 was 31.37 points (0.52%) lower at 5988.14, while the FTSE 250 had fallen 20.87 points (0.18%) to 11,696.

UK banks look set to defy public opinion and pay out another set of large bonuses despite calls from politicians to limit payouts. RBS, which was bailed out by the taxpayer at the height of the crisis, is thought to be preparing payouts of £1 billion, according to the BBC, and Barclays will also be giving out large sums, although the pot is expected to be smaller than the £5 to £6 billion paid out last year. However, banks have already raised salaries by 20 to 40% in order to compensate for reduced bonuses. Bonuses will also be smaller as investment banking revenues in 2010 were smaller than 2009. The news helped to keep bank shares subdued, with RBS down 1% and Barclays falling 0.22%.

A retreat in commodity prices, caused by worries about new Chinese monetary tightening efforts and the ongoing floods in Queensland, pushed mining stocks down. Fresnillo dropped 3% to 1529p while Antofagasta, BHP Billiton and Lonmin were among those seeing losses of more than 1%.

In sharp contrast to yesterday’s disappointing news from British Airways, budget airline easyJet reported that traffic in December rose 7.6%. 3.66 million flyers travelled on the firm’s planes, up from 3.34 million in 2009. The load factor, which measures how well the firm fills its planes, also rose, from 85.4% to 85.8% for December. It seems that easyJet has been relatively unaffected by the bad weather which closed a number of airports, particularly benefitting from the fact that it does not operate from Heathrow, which was badly hit by the heavy snowfalls. easyJet shares were 0.3% higher at 456.8p.

JD Sports also showed that the snow was no obstacle to rising sales, marking it out from a set of poor retailing results this week. JD said that like-for-like sales in the five weeks to 1 January rose 2.5%, and the firm now expects pre-tax profit for the year to 29 January to exceed estimates of £75.4 million. However, gains in the share price, which was up 3% to 892p, were limited by a cautionary note which said that the firm faced major challenges arising from the VAT increase to 20% and inflationary pressures stemming mainly from increasing raw material prices.

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Market Comment (7th Jan 2011, 11:00)

The FTSE 100 dropped back sharply this morning, weighed down by worries about the banking and mining sectors, as investors began to reduce positions after good gains earlier in the week. Caution also predominated ahead of the monthly US jobs report.